Fitch Ratings expects the major Greek banks to continue reporting good performances in 2007 on the back of sound domestic and regional economies, with continued demand for credit, adequate cost control and good progress in cross-selling, the agency said in a report. However, rapid retail loan growth in Greece and Southeastern Europe (SEE) could – if not properly controlled – lead in the medium-term to asset quality problems should economic conditions deteriorate and dent the banks’ good performances. «All major Greek banks considerably improved their pre-impairment operating profits in 2006 and, with the exception of Emporiki Bank, a falling share of impairment charges has additionally boosted their operating profitability,» says Cristina Torrella, director in Fitch’s Financial Institutions group. Real GDP growth in Greece was 4.2 percent in 2006 and even higher in SEE countries where most Greek banks are increasingly expanding their operations. Fitch expects growth rates for the region to remain broadly unchanged in 2007 and 2008. Strong loan growth, particularly in mortgages, SME and consumer lending, is also expected to continue as Greece and the SEE economies are converging toward penetration levels seen in Western Europe. The banks’ operating improvements in 2006 were largely driven by strong loan growth, which, together with broadly stable net interest margins, led to an increase in net interest income of 20 percent on aggregate. Torrella further commented that «recent efforts by the banks to improve their commissions line through improved cross-selling appear to have paid off as indicated by a 21 percent net fee income growth on aggregate.» Cost efficiency Treasury operations also positively contributed to the 2006 result. Investments in international operations continued at all banks in 2006, leading to a considerable increase in operating costs. Fitch notes that the rise in such costs nonetheless remained significantly below revenues and the average cost/income ratio improved to a commendable 55 percent. Cost efficiency, however, remains weaker than in many Western European banking systems, which is reflected in relatively high cost/assets ratios. Apart from Alpha Bank and ATEbank, impairment charges increased in all major Greek banks in 2006, albeit at a slower pace than their loan books, indicating a benign operating environment and generally improved risk management systems. Asset quality improved at all banks bar Emporiki, aided by strong loan growth, improved control and underwriting systems and, in the case of NBG, ATEbank and Eurobank, considerable write-offs. Impaired loans coverage appears adequate but should remain at the current level to account for rapid loan growth, the lack of seasonality in retail loan books and a greater share of higher-risk SEE loans. Reflecting strong loan growth and a shift toward loan segments with higher risk-weightings, capital ratios of Greek banks deteriorated in 2006 but remain in Fitch’s view adequate, with Tier 1 capital ratios between 11.4 percent at ATEbank and 7.5 percent at Piraeus. However, there remain also challenges for Greek banks’ including reducing their reliance on still wide but narrowing domestic lending spreads, making progress in fee income generation and cost efficiency and managing their regional expansion prudently, in particular with regards to controls and risk management systems. The major Greek banks covered in the report are National Bank (A- [A minus]/F2/Stable Outlook), Eurobank Ergasias (A/F1/Stable Outlook), Alpha Bank (A-/F2/Stable Outlook), Piraeus Bank (BBB+/F2/Positive Outlook), Emporiki Bank (A+/F1/Stable Outlook) and ATEbank (BBB+/F2/Stable Outlook).